ILLINOIS’ SECOND DISTRICT FINDS “NEW DEFAULT RULE” DOES NOT APPLY TO PREVENT DISMISSAL OF FORECLOSURE ACTION

Earlier this month Illinois’ Third District affirmed the dismissal of Wells Fargo’s complaint which was the bank’s third attempt to foreclose its mortgage lien against borrower Margaret Rodriguez (Rodriguez). Wells Fargo Bank, N.A. v. Rodriguez, 2024 IL App (3d) 230020, ¶ 1. Both the trial court and appellate court agreed that the single refiling rule prevented Wells Fargo from refiling its claim and both courts rejected Wells Fargo’s argument that the prior dismissals created a new cause of action under the new default rule.ⁱ

In 2009 Rodriguez executed a mortgage for $364,828 to purchase real property in Downers Grove, Illinois.ⁱⁱ Rodriguez defaulted in 2011, entered into a loan modification agreement the same year and then defaulted again in May 2012.ⁱⁱⁱ Wells Fargo sent a default notice in June 2012 and, when Rodriguez failed to cure the default, Wells Fargo sent a “notice of default and acceleration” in September 2012 which declared the “entire balance” on the loan “due and payable.”

In October 2012, since the default was not cured, Wells Fargo filed its first foreclosure action against Rodriguez alleging the original indebtedness of $364,828, a May 2012 default and an outstanding principle balance of $381,276.23.^iv Wells Fargo later amended its complaint asserting the same default, but alleging modified indebtedness of $384,413.69, but the same original indebtedness and the same outstanding principle balance of $381,276.23.^v Wells Fargo voluntarily dismissed that action in 2017.

In January 2018 Wells Fargo filed a second foreclosure action wherein it alleged the same original indebtedness, a December 2012 default, modified indebtedness of $358,051.01, and an outstanding principle balance of $377,530.71.^vi Upon Rodriguez’s motion, the court dismissed the January 2018 complaint with prejudice.^vii Wells Fargo did not appeal that order, instead it filed a third foreclosure action in August 2019 wherein it alleged an April 2019 default, the same original indebtedness of $364,828, and an outstanding principle balance of $330,085.81.

Rodriguez moved to dismiss the August 2019 complaint based on Wells Fargo’s violation of the single refiling rule^viii which prevents a party from refiling the same cause of action against the same party more than once. Rodriguez supported her motion with an affidavit wherein she acknowledged receipt of the acceleration notice in June 2012 and stated she never modified, reinstated, or cured the past due balance after Wells Fargo accelerated the loan.^ix

The trial court dismissed the third foreclosure action based on the single refiling rule because the August 2019 action “arose from the same set of operative facts” as the prior two actions.^x Specifically, the court explained that “the total amount due on the loan remained constant across all three actions and the acceleration of the note remained in effect the entire time.” Wells Fargo appealed the dismissal order.

On appeal Wells Fargo argued that its voluntary dismissal of the first action or the court’s dismissal of the second action “deaccelerated” the loan so that any subsequent actions were new causes of action and therefore exempted from the single refiling rule by the “new-default rule.”^xi Wells Fargo also argued that the complaint allegations regarding the date of default and outstanding principle amounts were different in each complaint so the operative facts were not the same. The Court rejected these arguments and distinguished the instant case from the Second District’s holdings in Dubrovay and Barrera wherein the Second District reached the opposite conclusion, applying the new default rule and reversing the dismissals of the banks’ complaints.^xii

The Third District explained that each of the three complaints Wells Fargo filed arose from “a single group of operative facts” in that “they were brought by the same plaintiff…, alleged the same original indebtedness, and asserted default of the same underlying note, mortgage, and modified loan agreement.”^xiii Notably, and unlike Dubrovay and Barrera, where the acceleration event was the filing of the complaint, in Rodriguez Wells Fargo accelerated the debt via its September 2012 letter which declared the entire balance due.^xiv

Since filing the complaint did not accelerate the debt, dismissing it (voluntarily or involuntarily) did not automatically de-accelerate the loan. The Court agreed with Rodriguez’s reasoning that she could not have committed “multiple defaults that could form the basis of different causes of action” because the loan remained in a constant state of acceleration where no new installment payments became due, and no new defaults were committed.

The Court relied heavily on the First District’s decision in Sigler^xv, which the Court noted had “nearly identical” facts, in concluding that once Wells Fargo invoked the acceleration clause, “the contract became indivisible, and the obligations to pay each installment merged into one obligation to pay the entire balance on the note.”^xvi The Court surmised that only the second foreclosure action was permissible under the single refiling rule.^xvii

Notably, in most circumstances, due to the installment nature of mortgage contracts, the new default rule will prevent an unjust dismissal and a windfall to the borrower; however, this harsh result in Rodriguez demonstrates the importance of a thorough review and analysis of the state of a loan prior to filing a foreclosure action, especially if the loan was previously accelerated. Due to the Court’s holding and the nuances raised by this case, we anticipate more litigation on the single refiling rule.